Subordination Agreements

Subordination Agreements: Underwriting Guidelines

When insuring transactions that rely on any subordination agreement, such instrument must be reviewed carefully and found to comply with the following requirements: 


1.  To be insurable,


a.  Subordination Agreement must be specific as to the particular transaction:  a. Instrument must be dated; 

b.  Must specifically recite the names of the existing mortgagor, mortgagee, new lender, the new loan document and its amount and the recording information of both documents; 

c.  A proper legal description of the land affected; 

d.  Language to the effect that the existing mortgage holder subordinates its interest to the new loan without condition; 

e.  If the new loan makes provisions for future advances or extensions, the subordination agreement must state that it is also subordinate to these matters. 


2.  The instrument must be properly executed, acknowledged, and recorded. 

3.  If there are modifications or changes in the terms of the new mortgage after the original transaction, an amended subordination may be required to reflect these changes. 

4.  The Company does not rely on automatic subordinations. Because many courts refuse to enforce automatic subordinations to future construction loans, Agents National Title does not authorize the issuance of its policies insuring a first lien position pursuant to blanket, automatic, or general subordinations. 

5.  The agent should obtain proof that the individual executing the subordination agreement has the authority to act on behalf of the company. 

6.  A mortgage which has been subordinated must be listed as an exception under Schedule B-II of the final title policy (subordinate matters) and may conform to the following language:  

“Mortgage dated ____________, executed by ____________, in the original amount of $______, in favor of __________, recorded ________, in Book ____, Page _______, Records of __________ County, State of ______________; made SUBORDINATE to the insured mortgage by Subordination Agreement dated __________, and recorded on ___________, Book _____, Page ______, Records of ___________ County/Parish, State of ________________.”


7.  Check with your local Agents National Title underwriting counsel for any state-specific requirements.


Caveat: Section 1823 of the Federal Deposit Insurance Corporation Act allows the FDIC to disallow or not be bound by any document which diminishes or reduces the interest of a failed bank unless such document has been expressly approved by resolution of the bank’s Board of Directors or Loan Committee. This applies to subordination agreements which subject a mortgage to the bank to another loan. To avoid possible problems which could arise in the event of failure of the subordinating bank, Agents National Title requires that any subordination agreement signed by a bank, savings and loan institution, federal savings bank, or other financial institution governed by FDIC must be approved by a resolution of the bank’s Board of Directors or Loan Committee, and a copy of this resolution must be retained in the agent’s file.